Updated May 2016
Antitrust laws prohibit anti-competitive or unfair business practices. The penalties for antitrust violations can be substantial. “Minimum service” or “limited service” brokers have introduced new business models to the real estate industry that have resulted in a great deal of controversy and discussion. Given these discussions, and the existing political climate, it is vital for brokers to understand and comply with the antitrust laws.
Federal Antitrust Law
The Sherman Antitrust Act was enacted in 1890 and was named for Senator John Sherman from Ohio. The term “antitrust” was used because the law was originally enacted to prohibit “business trusts.” A business trust was a form of business entity used in the late 19th century. A business trust was created when corporate leaders convinced shareholders of all companies in one industry to transfer their shares to a board of trustees in exchange for dividend-paying certificates. The board of trustees would then manage all the companies in “trust” and minimize competition in the process.
The Sherman Antitrust Act declared every contract, combination or conspiracy in restraint of trade illegal. The Act states in Section 1:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court. 15 U.S.C. §1
Thus, the Sherman Antitrust Act sets forth two elements of a Section 1 violation: (1) a contract, combination, or conspiracy (2) that restrains trade. According to the U.S. Department of Justice Antitrust Manual, the most common violations of the Sherman Antitrust Act and the violations most likely to be prosecuted criminally are price fixing, bid rigging and territorial or customer allocation among competitors (“horizontal agreements”).
The U.S. Supreme Court has issued numerous opinions interpreting the Act. In doing so, the Court identified certain restraints, such as agreements to fix prices, agreements not to deal with a competitor or supplier, and agreements to allocate territories in order to minimize competition as per se violations, meaning that the agreements are assumed to be antitrust violations without further evidence. See, United States V. Topco Associates, Inc., 405 U.S. 596 (1972).
TIP: Do not agree with another broker, explicitly or implicitly:
- To charge sellers a certain commission amount
- To offer cooperating brokers a certain commission split
- To refuse to cooperate or deal with another brokerage firm
- To divide or allocate territory
- To boycott or not use a certain service provider
Further, avoid any activities or discussions that even create the appearance of such agreements.
Arizona Antitrust Law
Arizona also has enacted statutes that mirror federal antitrust law. Pursuant to A.R.S. §44-1402 “[a] contract, combination or conspiracy between two or more persons in restraint of, or to monopolize, trade or commerce, any part of which is within this state, is unlawful.” The Arizona Attorney General’s office is charged with enforcing the state antitrust laws. See, A.R.S. §44-1406. In an action in which a person or entity is found guilty of an antitrust violation, the court may assess a civil penalty of up to $150,000 for each violation. See, A.R.S. §44-1407. In addition, a person who is threatened with business injury due to an antitrust violation may bring a court action for damages. In such action, if the court finds a “flagrant” antitrust violation, it can award treble damages. See, Western Waste Serv. Sys. v. Superior Court, 120 Ariz. 90, 584 P.2d 554 (1978) (Defining ”flagrant” as conduct that is shocking, outrageous, or outstandingly bad.)
NAR REALTOR® Magazine Online provides “4 Antitrust Traps to Avoid”
Although the subject of avoiding possible antitrust violations covers many areas, a few of the most sensitive antitrust concerns include
1.Price/term fixing. In most businesses, including real estate, many competitors may charge similar prices for the same services. This isn’t illegal as long as each competitor sets prices independently. An antitrust violation occurs when you discuss and actually agree to charge the same prices or offer exactly the same terms as one or more of your competitors.
Avoid problems by: Establishing your company’s fees, commission splits, and listing terms independently and without any discussion with competitors. Even informal conversations where you have no intention of actually setting prices could be misinterpreted as the basis of a price-fixing agreement.
2. Territorial assignments. Agreements between competitors to divide the market geographically, by price range, type of property, or some other segmentation are considered anticompetitive because they conspire to establish dominance in a particular market. This isn’t the same as an individual company’s practice of specializing in certain properties such as historic buildings or custom-built housing.
Avoid problems by: Documenting your decisions to focus on certain property types with marketing and demographic studies.
3. Boycotts. Boycotts occur when a group of businesses agree not to do business with a particular party. A typical group boycott allegation in the real estate brokerage business involves a claim that two or more brokerages have agreed to refuse to cooperate, or to cooperate on less favorable terms, with a third brokerage company. The intent is to eliminate that company as a competitor or to force it to abandon certain practices. Another form of boycott would occur if several companies collectively determined not to use a particular service provider, such as a certain newspaper.
Avoid problems by: Making decisions on whether to do business with other real estate companies or service providers based on your company’s own judgments, goals, and experiences.
4. Association meetings. Associations are groups of competitors who come together to promote their common business interests. As such, they are vulnerable to allegations that agreements by members to use identical business practices are illegal conspiracies.
Avoid problems by: Remaining alert to discussions at meetings relating to commission rates, pricing structures, listing policies, or marketing practices of other brokers.
Portions adapted from Real Estate Brokerage, 5th edition, Cyr, Sobeck, and McAdams, Dearborn Financial Publishing, 1999
TIP: Any business or marketing plan that’s principal goal is to adversely affect a competitor could be considered a violation of antitrust law. —Jodi Tuttle, “What You Don’t Know About Antitrust Can Ruin You,” Indiana REALTOR® , May 2001
For more information see:
NAR’s Field Guide to Antitrust www.realtor.org/libweb.nsf/pages/fg704
AAR’s Legal Information on Antitrust: www.aaronline.com/documents/AntiTrust.aspx